October 07, 2011

MFC Bancorp Ltd. (Appellant) v. Her Majesty the Queen (Respondent)

99 DTC 905
Tax Court of Canada
August 18, 1999

(Court File No. 97-2105(IT)G.)

Inclusions in income — Royalties — Corporate taxpayer in receipt of certain royalty payments — Later, taxpayer no longer receiving such payments directly, but Minister including them in taxpayer’s income under subsection 56(4) of the Act — Whether taxpayer no longer having any beneficial interest in the royalty agreements providing for the payments in issue, thereby rendering subsection 56(4) inapplicable — Income Tax Act, R.S.C. 1985 (5th Supp.), c.?1, as amended, ss.?56(2), 56(4), 181.2(3), 245(2) and 251(1)(b).

The corporate taxpayer, a public corporation, had acquired mining concessions and railway rights-of-way that it leased to a consortium of steel producers under various agreements referred to as “Royalty Assets”. The Royalty Assets provided for the payment of royalties based on the tonnage of iron ore shipped from the leased lands. Applying the provisions of subsection 56(4) of the Act, the Minister included in the taxpayer’s income for 1992, 1993 and 1994, certain royalty payments payable under the Royalty Assets. (Subsection 56(4) includes in a taxpayer’s income amounts transferred to third parties that, had they been received by the taxpayer directly, would have been included in his income. The subsection, however, does not apply where the property giving rise to such income amounts has been assigned by the taxpayer.) The taxpayer appealed to the Tax Court of Canada, alleging that its entitlement to receive any payments due under the Royalty Assets Agreement no longer existed after January 1, 1992.

Held: The taxpayer’s appeal was allowed. On the evidence, the taxpayer no longer had any right to payments under the Royalty Assets after January 1, 1992. The taxpayer’s entire beneficial interest therein was transferred in an agreement bearing that date, and the taxpayer had no reversionary interest therein. For these reasons subsection 56(4) was inapplicable. The Minister was ordered to reassess accordingly.